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A Fresh Look At Manufacturing

BERLIN – It has happened before: The economy cools, consumer spending sags, employment declines, corporate earnings fall back, and suddenly a stock market that only months earlier had touched record highs is reeling. What the U.S. is going through now is partly a result of market and economic cycles, partly a matter of circumstances unique to the moment — but it will not last forever. While it’s difficult to predict exactly how the current turbulence will play out, one sector poised to do comparatively well in the months ahead might come as a surprise to those who remember only its Rust Belt past: manufacturing.

In fact, the industrial sector is mounting a slow but steady comeback, reaping the benefits of a long retrenchment and enjoying a boost from the flagging dollar. Companies making everything from cement, turbines and tractors to machine tools, pumps and chemicals appear to be moving toward a new era of stable long-term growth. According to David Rosenberg, Chief North American Economist at Merrill Lynch in New York, the U.S. manufacturing sector is on its best competitive footing internationally in 30 years.

“We’re in the early stages of a renaissance,” Rosenberg says. “For investors, U.S. basic industry is now a very good place to be.”

U.S. companies that generate much of their revenue abroad may be in a particularly strong position, with the weak dollar giving a strong lift to exporters and providing extra profit when revenue earned overseas is converted into greenbacks. “U.S. industrial multinationals are benefiting twice, from strong global growth and from the currency translation effect,” says Daniel Meckstroth, chief economist at the Manufacturers Alliance/MAPI, an Arlington, Va., trade group.

Such advantages are helping manufacturers capitalize on decades of productivity gains, enabling them to do more with fewer workers. That has made producing goods in the U.S. surprisingly competitive with traditionally low-cost locations, Rosenberg says.

Growing foreign direct investment is also bolstering manufacturing exports, which were up a near-record 12% in 2007, and helping shrink the current account deficit—the amount by which capital flowing into the country exceeds what’s going out. That deficit receded from a record 7% of GDP in 2005 to about 5% in 2007. The trend is even more dramatic when you exclude

What’s more, manufacturers that are diversified are expected to do well even if the broader global economy cools. Merrill Lynch Research predicts total U.S. exports will rise 8.5% in 2008, even though non-U.S. global growth may slow to 5.5%. And robust demand should continue to strengthen export prices. “Big, diversified U.S. multinational manufacturers have pricing power for their exports, thanks to the weak dollar and because there’s simply a huge boom in industrialization around the world,” says U.S. Sector Strategist Brian Belski.

And while a global slowdown could lead to a temporary cutback in business spending by manufacturers, it’s unlikely to last. “The one- to three-year trend is for continued business spending, because companies need to replace aging capital stock, invest in plants and equipment, and update technology,” Belski says. “And they’re certainly better positioned to survive a downturn than they were in the past.”

While it may take some time for some individual industries — the automotive business, for one — to catch up, many segments of the U.S. manufacturing sector are already seeing a better future unfolding.

(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)